THE GOVERNMENT has announced changes to reporting and auditing requirements that will allow more small companies and subsidiaries to decide whether or not to have an audit.
The changes, announced by business secretary Vince Cable in response to the consultation on Audit Exemptions and Change of Accounting Framework, also make it easier for companies to move from IFRS to UK GAAP.
"Tackling these problems will help save UK companies millions every year and free them up to expand and grow their business, which ultimately benefits the entire British economy," Cable said.
Current UK rules state SMEs must both have a maximum balance sheet total of £3.26m and less than £6.5m turnover to qualify for an exemption. The new regulations mean SMEs will be able to obtain an exemption if they meet two out of three criteria relating to balance sheet total, turnover and employing no more than 50 staff.
This change will allow 36,000 more companies to choose not to have an audit.
The government will also exempt most subsidiary companies from mandatory audit, as long as their parent company guarantees their liabilities. A further 83,000 subsidiary companies will benefit.
In addition, another 67,000 dormant subsidiaries will no longer need to prepare and file annual accounts, provided they receive a similar guarantee.
Following consultation by the FRC on changes to UK GAAP, the government has also decided to allow companies that prepare their accounts under IFRS to move to UK GAAP and take advantage of reduced disclosures.
Commenting on the BIS announcement, Henry Irving, head of ICAEW's Audit and Assurance Faculty, said: "ICAEW supports a deregulatory approach to stimulate sustainable growth. However, it is crucial that smaller businesses remain focused on having strong financial controls and appropriate management oversight, as that is critical for business confidence, which – in turn – is vital for growth.
"Audit and other types of third-party assurance play a key role in instilling confidence. Being able to produce independent verification of the company's financial statements can be important for securing finance, for example. Therefore, companies that may be exempt under the new regulation may still choose to have an audit done."
The regulations are expected to come into force for accounting years ending on or after 1 October 2012.
The heading of the topic states "lowers audit threshold" which to me sounds more entities will get caught in to an audit or not? + plus waht are the new audit thresholds. Can someone also explain if an entity has a 31st Dec 2012 year end, how will the thresholds be applied?
Posted by: Sam, 10 Sep 2012 | 15:32
This "two out of three" criteria approach sounds to me more like coming into line with an EU norm for defining an SME than a brilliant initiative by UK government.
Posted by: Duncan, 10 Sep 2012 | 16:39
The BIS press release refers to accounting years ending on or after 1st October and this has been picked up by a number of professional news wires.
However the written statement delivered to Parliament and included in Hansard for Thursday 6th September at column WS27 (and which can be viewed at http://www.publications.parliament.uk/pa/cm201213/cmhansrd/cm120906/wmstext/120906m0001.htm#12090625000002) refers to accounting years *beginning* on or after that date.
I have sent an email to the department for clarification
Posted by: Chris Wiltshire, 11 Sep 2012 | 00:30
Audit = Corporate Governance & discipline as well as good practice. Companies who discard the audit process may require finance in the future. Beware of short term gain.
Posted by: Stewart Gordon, CA, 12 Sep 2012 | 13:09
"Cable LOWERS audit exemption threshold" is wrong heading i think. Audit threshold is not changing but only audit exemption criteria will be going to change i.e meet two out of three.
Posted by: Muhammad Yousaf, 13 Sep 2012 | 16:55
How does it "free them up to expand and grow". Usual political rhetoric to me.
Also if it will save companies £millions, won't it also cost audit firms £millions, or lead to job losses?
Posted by: Peter, 13 Sep 2012 | 17:05
I fully support the drive to reduce regulatory burdens on small businesses that BIS is working towards. However, we must be clear that an audit goes beyond simply providing an opinion regarding compliance. A skilled auditor will perform and investigation into the risks faced by the organisation by, in part looking at the risks and the strength of the internal controls of the firm being audited.
This would give valuable insight into the organisation with regard to both improving the levels of compliance and performance of the firm. This adds to the attractiveness of the company when it contemplates being sold. This is done by adding systems and controls that make it easier for a third party to utilise as the management information system becomes objective and not reliant on the personal understanding of the owner.
The auditor has a broad range of knowledge and experience that can be used to improve the effectiveness, efficiency and economy of the firm. This is unlikely to be acquired by the owner manager, as the exposure is less likely to be shared in a competitive environment.
When we look at further reductions, could we ask Vince Cable:
Are we are cutting costs or investments? Both are expenditure but they do not always yield the same thing.
Are we building sustainable firms that are structure to grow in this recession?
Are we giving companies what they want or what they need? The banks got what they wanted, which is not always what the nation needs.
Posted by: Michael Parker, 13 Sep 2012 | 17:24
I would admit that I am no auditor and so, naturally, I welcome the reduction in the burden on small companies. I also think the arguments for retaining audits e.g. bank financing, loss of revenue and jobs for larger audit firms show a lack of imagination. Surely the "skilled auditor" would be of far more use to the smaller company using his skills to focus on the critical areas to their business in a management consultancy role than a much wider statutory audit review. Would the client also not perceive the focussed advice of more value than a legislatively imposed audit?
The onward business sale argument is also fairly insiginificant, as most purchasers would, hopefully, uncover the product of the sound management consultancy advice within their due diligence.
To quote, although probably not verbatim and I also do not know who said it, "Every problem gives rise to an opportunity". All you need to do is think outside the box!
Posted by: Mike, 15 Sep 2012 | 11:20
The forecast annual savings of £390m (revised down from £612m) seem unlikely to be met. They are based on relatively bullish uptake rates (50-75% of subsidiaries and 60% of small companies).
The fact that parent companies will have to guarantee the debts of their subsidiaries will mean that only the smallest subsidiaries, or those that are barely trading, will attract the exemption.
Large subsidiaries will undergo a similar amount of audit work as part of a group audit, so savings would be minimal for these entities.
Whilst the benefits for UK competitiveness are undeniable, the savings will likely be lower than the government's expectation.
Posted by: Adam Goodall, ProConfirm, 16 Sep 2012 | 20:54
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